Many college students with credit cards have debt, survey says

Student loans aren’t the only type of debt that college students may have to contend with these days, as a large portion of degree seekers have also accumulated credit card debt, according to a survey from U.S. News & World Report.

The September poll said that more than 67% of undergraduate students have a credit card, which can be a smart choice as it is a powerful tool to help them build their credit history.

However, 46% of college students with a credit card in their name have debt and 27% of them reported owing more than $2,000, the survey said.

While college students' aforementioned credit card debt is less than the average U.S. credit card debt — which stands at $5,010 per person, according to TransUnion — it can have outsized effects after graduation. As students transition into the working world, having high-interest debt from credit cards, potentially stacked on top of student loan debt, can leave fresh graduates treading water rather than building wealth.

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Students lack credit knowledge, survey says

College credit card debt can have numerous causes, such as the rising cost of university attendance and current economic factors like higher interest rates and inflation. Another reason is students' lack of credit knowledge.

For instance, more than half of the U.S. News survey respondents said they were unaware that the longer they waited to pay their bill, the more their credit would be damaged. Additionally, 20% of students said they believed that carrying a balance on a credit card at the end of a billing cycle increased their credit score.

The survey also indicated that students’ lack of knowledge also extended to the credit system as a whole. Only 20.8% of respondents selected the right answer when asked what a credit score measures: the risk that a borrower will default on a loan.

If you have taken on credit card debt and need help paying it down, you could consider consolidating it with a personal loan. Visit Credible to compare multiple personal loan lenders at once and find the best interest rate for you.

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What are the benefits of student credit cards

Despite the risks, opening a credit card can be a smart choice for college students. With the right knowledge, a credit card can help create a financial foundation that could benefit students long after graduation. Here are four ways a credit card can help college students.

1. Establishing a credit history

Degree seekers can use a student credit card to help them get an early start on establishing a credit score and building a credit history. A credit score, which ranges from 300 to 850, is crucial for life after graduation and can come into play in instances such as renting an apartment or borrowing a loan.

It's important to remember to pay your monthly credit card statement in full and on time to avoid dings to your credit score and accruing compounding interest on what you owe.

Also, keep an eye on your credit utilization, or the amount of available credit you use, which shouldn’t typically exceed 30%. Credit utilization makes up 30% of a FICO credit score, while payment history accounts for 35%.

2. Teaching financial literacy

For many students, college can be the first time they've needed to pay closer attention to money. A credit card can help young adults learn about core concepts like budgeting, interest, credit scores and debt. Student cards can have lower limits and can be a good way to help students familiarize themselves with the inner workings of personal banking and credit before graduation.

3. Earning rewards and cash back

College is expensive, and some credit cards can help students save money with cash back on everyday purchases. Additionally, some cards cater to specific spending categories and provide rewards programs or cash back on dining, entertainment, popular streaming services and everyday purchases.

4. Preparing for emergencies

A credit card can help give students and their parents peace of mind that they have access to money in an emergency situation. Some credit cards also offer purchase protection and can help students replace damaged or stolen items, such as cell phones or laptops.

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How to build credit in college

Getting a credit card can be a challenging task for a college student, given that they typically have little to no income and a thin to nonexistent credit file. Since 2009, applicants younger than 21 have been required to prove that they have the income to pay for purchases bought with a credit card or get a co-signer, such as a parent or a guardian, according to Cornell Law School’s Legal Information Institute.

If you are denied a student credit card, there are other routes. These include becoming an authorized user on a parent’s credit card or applying for a secured credit card.

What is an authorized user?

An authorized user is someone who is allowed to use another person’s credit card account with their approval. The authorized user receives a card in their name that is linked to the primary cardholder’s account. The benefit of this setup is that the new user can build credit and make purchases without undergoing the same scrutiny as they would when applying for their own card.

However, there are disadvantages to being an authorized user. While an authorized user's card is linked to the primary account holder, they will benefit from any positive activity but are also exposed to the negative activity. For example, an authorized user's credit score can be adversely impacted if the primary account holder misses a payment or carries a high utilization.

What is a secured credit card?

A secured credit card requires the user to deposit money that will be used for the credit limit into an account, meaning the user can never spend more than they have. For instance, if you deposit $1,000, the limit on your credit card will be $1,000.

While secured credit cards typically come with few or no perks, they are a great way to build credit. And the deposit you make to open the card can always be refunded if or when you close the account.

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